Post by
megacopper on Oct 01, 2006 8:45pm
Junior Miners Set to Shine
Junior Miners Set to Shine, Says Analyst
Tuesday, September 26, 2006
By Darin Diehl
Majors seen scrambling for new production
There has been no shortage of dire warnings about the volatility and downside potential of the metals market in recent weeks - coinciding with the slump in metals prices. But investors attending this year's Cambridge House Resource Investment conference in Toronto heard a very different story from a couple of investment newsletter editors and mining industry analysts.
"In all the years that I've been in the mining industry I've never seen as much confusion, as much uncertainty as what the future holds for the metals markets," Lawrence Roulston, editor of Resource Opportunities, told investors attending an afternoon speaker session. He echoed the sentiments of the speaker that preceded him, Hard Rock Analyst Eric Coffin, who told the audience that "the doom and gloom has been overblown in the last six weeks."
Both analysts believe investors have a real opportunity now to take advantage of the spikes and pullbacks that have characterized the metals market in recent weeks. "Markets sometimes get a little bit ahead of themselves, then they correct," Coffin said. "They get a little bit behind themselves, and people start feeling brave again."
Coffin advised investors not to sit on the sidelines, but to still exercise due diligence. "Pick your spots. Buy on weakness. Put in bids. You don't have to chase everything. Quite the contrary, you can probably let some come back to you." He emphasized that investors can't get too caught up in the short term. "Don't forget that we are in the early innings of a very long game and it's not over yet."
In his presentation, Laurence Roulston examined a number of factors that he says will keep the metals market investment worthy for the long term. On the notion that a slowdown in the U.S. economy means the end of the party for metals, Roulston notes that even if there is zero growth next year there's no real cause for concern. "Nobody is suggesting that economic activity in the United States is going to come to a halt. So if we see zero economic growth in the U.S. economy, we will still use about the same amount of metal next year as used this year. And that's not a doom and gloom scenario for the metals markets as far as I can see."
Furthermore, Roulston argues that the U.S. dollar is likely to continue to depreciate over time - and says for that reason investors may want to consider gold. "There is a real increase in investor demand for gold and that has pushed the price up." He says the big upturn in the gold price over the last year is a result of more and more investors around the world recognizing that gold is a currency hedge. "My outlook going forward for the gold market is we're going to see exactly what we've been seeing over the last five years - we're going to see an upward trend, perhaps an accelerated upward trend as more and more investors get into the market seeing gold as a currency hedge."
Roulston also sees the steady weakening of the U.S. dollar as a good thing for another reason. "With all of the debt in the United States impacting on the U.S. economy and the dollar, the fact that the dollar is sort of gradually lessening in value is sort of a pressure release valve, it's taking the pressure off and it's lessening the prospect for some sort of catastrophic correction."
The other point he emphasized to investors is that they should not tie too directly the price of metals with the value of junior mining companies. "When I look at a company I'm not looking at it as a currency speculation or a commodities speculation, I'm looking for companies that are adding value. I'm looking for companies that are exploring and developing and are advancing deposits towards production and are adding shareholder value - independent of whatever happens in the metal price."
Other speakers at the conference talked about how speculators continue to have a major impact on metals prices. While acknowledging speculators as a factor affecting prices, Roulston argues that "base metal markets at this time are dominated by basic supply-demand fundamentals." He says China also remains an important element of the demand picture in metals.
Roulston says large mining companies have been more focused on buying up other companies - "which does absolutely nothing to increase the amount of metal production." In the last year, Roulston noted, the takeovers from the majors, the offers for the smaller companies, have totaled $5 billion dollars. "I see that as just the beginning of what's going to be a takeover binge as the major mining companies realize that they need to start developing more mines. There's soon not going to be anything left to buy and they are going to have to get out and develop some new mines. And when they do that, they are going to turn to the junior companies."
Roulston says he's not necessarily forecasting higher metal prices - and says speculating on the price of metals is not what he does. "My basic message here is that there is real solid fundamental demand for metals that is exceeding the ability of the mining industry to supply metals. There's not a lot of new production coming on stream in the new term, therefore metal prices are going to stay high for a long time."
As he wrapped up his presentation, Roulston pleaded with investors not to confuse speculating on a metal price with investing in an emerging company. "We don't need gains in the metals prices to see big gains in the values of these smaller companies when they're advancing deposits toward a level where they're either going to go into production for themselves or they're going to be taken over by somebody that will put them into production.," Roulston said. "It's just an excellent time to be taking a position in junior mining companies," he concluded.